The Immaculate Conception of Bitcoin and What it Means for Competitors
July 12, 2023 by Thorkil Værge
The Immaculate Conception of Bitcoin and What it Means for Competitors
Few things amaze me as much as the history of Bitcoin, and few things inspire my confidence in humanity as the way in which it was launched.
With the release of Bitcoin in January 2009, Satoshi Nakamoto managed to not only solve a well-formulated problem of computer science, the Byzantine's Generals Problem, and a less-well formulated problem of economics, synthesizing scarcity, he managed to do so anonymously. Even 14 years after Bitcoin's launch, Satoshi Nakamoto's real identity is still not known. Never before in the history of mankind has a trillion-dollar asset been invented without its creator being known.
On top of this, comes the fact that he doesn't seem to have used his invention to enrich himself. Blockchain data reveals that Satoshi Nakamoto did mine over a million bitcoin in 2009, but those bitcoin have never moved. Were these coins mined simply to restrict supply and thus make Bitcoin a more attractive investment to increase its chances of success? That idea seems more and more likely by each passing day where those coins do not move. The release of Bitcoin, anonymously, openly, preannounced, without a premine, and apparently without enriching the creator, sets a bar so high for anyone hoping to bring innovation to the world of blockchain that it can probably never be matched.1
This behavior is far removed from the normal image of finance that most of us have. Finance is usually seen as a place of cutthroat capitalism, where everyone is out to enrich themselves. At the expense of the greater good, if needed.
In this light it's no wonder that new blockchains are often met with skepticism, as most of those blockchains allocate a part of the total coin supply to their creators and early investors. Why settle for anything less fair than Bitcoin when we have such a good starting point?
What Problem did Bitcoin Solve?
To fully understand why some people have a near-religious appreciation of and fascination with Bitcoin, one has to first appreciate the problem that it solves. Describing that problem as one of computer science or one of economics does not do it full justice. A better description is one of emancipation.
The Problematic Printing Press
The invention of Bitcoin came on the back of the financial crisis of 2008 where trillions of dollars were printed into existence to save the financial and monetary system from the combined errors, neglect, greed, political opportunism, incompetence, and carelessness of central and private banks. Some believe that the individuals taking loans they could not repay were the problem, and some believe the incentives of the financial system created a moral hazard. Who did what, and who the main culprits in those events were is a rather political question, which I believe there are many plausible answers to. What is less controversial though is that this money printing came at the expense of people who lived within their means, who were responsible economic actors. It reduced the value of their savings by rewarding incompetence and greed and punishing frugality. Pensioners, workers, and companies living within their means had their purchasing power taken from them through the means of the printing press.
In the developed world (after World War 2) this money printing is admittedly mainly a concern of a minority of politically motivated ideologues. It might be hard to notice the effects of 3 % inflation per year if you have never experienced anything else.2 But in other countries like Zimbabwe, Venezuela, and North Korea the value of your savings can be destroyed overnight, as they have recently suffered from inflation of 1000s of percentage points a year. Even in middle income countries like Turkey and Argentina, the population is currently suffering under 38 % and 114 % annual inflation.3 In that environment it is impossible to save for anything, whether you are a business or a private individual. And you can forget about retirement.
For some, at least, the most frustrating aspect of this experience might not be the financial loss that is suffered but rather the fact that it is not part of the political discourse. Where are the pensioners protesting the bank bailouts? Where are the hardworking taxi drivers demanding a new Chair of the Federal Reserve because their kid's college funds no longer suffices?
With Bitcoin the sufferers of inflation got a way of opting out, you didn't have to care if your neighbor or political representative understood or cared about the inherent instability of fractional reserve banking, the moral hazards of the private banking system, or the self-serving nature of central banks. And in a wider sense, we got a sense of hope for the future. Perhaps the future did not only belong to the bankers (public or private) and the political opportunists who could and would navigate the world of favors? Perhaps we had a chance to increase the role of meritocracy in the market place and to give everyone an opportunity to dream of a better tomorrow.
Where Does this Leave Bitcoin's Competitors?
The problems outlined above show that, at least for some, the support of Bitcoin is not primarily motivated by getting rich or working with interesting technology; the support first and foremost comes from a moral conviction.
In this light, it seems relevant to ask: What role has Bitcoin's immaculate conception played in its ability to conquer its market share?
Would Bitcoin have been equally successful if it had had a group of investors that paid the salaries of Satoshi Nakamoto while they developed the Bitcoin protocol and which Satoshi Nakamoto had to reward with premined Bitcoin once the protocol was launched? Would Bitcoin have reached the success it has today if Satoshi Nakamoto had said "Here's a new form of money, and by the way I allocated 20 % of the total supply to myself"?
Perhaps the dedicated team of Bitcoin Core developers would not have existed if Satoshi Nakamoto had granted himself special rights on the blockchain? Developers who dedicate a big portion of their time and energy towards open source software projects are often motivated by ideology, because they believe their work makes the world a better place. This ideological pull towards Bitcoin would probably have been smaller, had Bitcoin had a premine.
That being said, these counterfactual questions are impossible to fully answer, as we don't have a lot of datapoints to go by.4 So some speculation is required. Because of the many problems of government-issued money, it is reasonable to assume that cryptocurrencies would still be a relevant alternative. But perhaps this hypothetical Bitcoin-with-a-premine would not have been the market leader as it would have been outcompeted by a copy of the protocol that discarded the premine, or simply had a smaller one? Or perhaps it would have been outcompeted by later inventions that both had a fair start and brought new innovation to the table?
No matter the importance of the immaculate conception it's probably impossible to beat Bitcoin on this parameter. And it's improbable to even match it. But Bitcoin can be challenged on other parameters than the fairness of its launch.
Opportunities in Innovation
Ethereum introduced full programmability of its smart contracts, whereas Bitcoin's programmability is rather limited.5 Ethereum currently has a market cap of a little more than a third of the market cap of Bitcoin, 220bn USD vs. Bitcoin's 600bn USD. Ethereum has achieved this success even though its launch heavily favored insiders with around 60 % of the current supply coming from the premine, and 19.8 % of that premine being awarded to its inventors. It is reasonable to credit the significant market share that Ethereum has conquered to its technological innovation. The innovators within privacy such as Monero and Zcash have also managed to claim a share of the total cryptocurrency market as have the stablecoins. The value of stablecoins follow government-issued currencies but can be transacted on the blockchain. Stablecoins are usually transacted on blockchains with low transaction fees such that smaller transactions are still economically feasible.
Why should we care about market cap if the main motivation for working with blockchain is a moral one? Because market cap is a metric which can be used to judge impact. The more widely a blockchain is being used, the more users it will have, and the more demand for it there will be.
Judging from market cap alone, the most demanded features not present in Bitcoin are, in order:
- cheap transactions, i.e. throughput scalability as the stablecoins require
The current market situation shows us that technological innovation can help competitors carve out a market share of the crypto currency market, and that there is a market demand for programmability, throughput scalability, and privacy.
What does the Future Hold?
This leads us to two questions:
- Which technological innovations, if any, are big enough to make a new blockchain relevant?
- Can't Bitcoin simply copy those features through an upgrade of the protocol?
Let's start by addressing 1: Ethereum has already proven that there is a market demand for full programmability of smart contracts. And Monero and Zcash have shown us that there also is a demand for privacy in blockchain. The cost of doing a transaction is clearly also an important factor, so throughput scalability matters. Attempts to improve throughput scalability have already led to major inventions such a Bitcoin's Lightning network, and Ethereum's multitude of projects to bundle transactions through SNARK-based solutions6 as well as more centralized blockchain projects such as Binance Smart Chain.
Another candidate for innovation is post-quantum security. Currently, quantum computers big enough to break the cryptography used by Bitcoin or Ethereum are not believed to exist. But a study revealed that more than half of the experts questioned found it likely that quantum computers would threaten commonly used public key cryptography, as is used by Bitcoin and Ethereum, within 15 years.7
Answering 2 becomes more speculative: How much of this innovation can Bitcoin adapt, can Bitcoin be upgraded to support throughput scalability, full programmability, privacy, and post-quantum security? Bitcoin Lightning already shows a way towards throughput scalability as well as improvements in privacy. And if Bitcoin is upgraded with its Bitcoin Improvement Proposals BIP300 and BIP3018, which would introduce trustless sidechains based on the Bitcoin currency, these sidechains could offer both full programmability and better privacy for its users. With Bitcoin Core developers' historic resistance to change and potentially unrevealed techonological issues the introduction of trustless sidechain to Bitcoin is a big "if". And actual implementations of sidechains for Bitcoin so far do not seem to be taking off.9
Bitcoin does seem to at least have a way forward to address throughput scalability, and a potential way forward to address privacy and programmability, if a consensus to implement these proposals can be found. That leaves only post-quantum security completely out of reach for Bitcoin, as all Bitcoin in existence today are tied to public keys that would leak the secret key to an attacker that wields a big enough quantum computer10. Upgrades to the Bitcoin protocol to allow the use of post-quantum cryptography could be made, but that still leaves the problem of migration to a post-quantum signature scheme: How do you migrate all balances tied to quantum-insecure public keys to the new post-quantum public key system?
Neptune aims to embrace these technological innovations that there clearly is a demand for: full programmability, throughput scalability, and privacy. As well as addressing the threat from quantum computers by providing post-quantum security at genesis.
We aim to use a similar scalability solution to that which Ethereum is developing by basing our blockchain on a zero-knowledge STARK virtual machine. And we aim to build a lightning network similar to what Bitcoin is using to allow for a high transaction throughput.
At the same time, we seek to approximate Bitcoin's immaculate conception. We cannot hide our identities like Satoshi Nakamoto did, but we can dissolve the founding company some time after the launch of main net such that the blockchain will be without a clearly defined leader and true decentralization can emerge. And we can minimize the premine such that it only suffices to pay for the development of the protocol. We hope that this approximation is good enough to motivate some developers to contribute to this project.
Bitcon's immaculate launch was both a noble and a novel vision of the future. The high bar that it set has immunized at least a part of the crypto currency enthusiasts from throwing their good money after bad, and has given Bitcoin a team of ideological developers dedicated to improving the software.
Bitcoin does seem to have a way forward to overcome some of its technological shortcomings with transaction throughput showing the most potential. Improvements to privacy and programmability is currently being held back by (potentially healthy) developer skepticism.
New blockchain projects that deliver technological innovation have been seen to conquer market share with programmability attracting the most money, followed by transaction throughput, and then privacy.
Neptune attempts to hit the sweet-spot of this technological demand: full programmability, throughput scalability, privacy, and post-quantum security at genesis. At the same time, we strive to approximate Bitcoin's immaculate conception through two factors: by minimizing the premine while still having enough resources to develop the protocol, and by committing to give up control of the project by withdrawing from its development by 2026.
I don't want to leave the reader with an impression that Satoshi, if he is still around, would not be in his good right to spend their 1m BTC at any point they see fit. Sitting on 30bn USD as they would be today if they still had access to the coins would reveal an unprecedented patience and commitment to the project.
3 % inflation over 40 years still amount to a 70 percent reduction in your purchasing power.
Inflation numbers found on: https://tradingeconomics.com/country-list/inflation-rate.
The only imperfect datapoint I can think of that compares a blockchain with a premine to another with similar functionality but without a premine is Zcash vs. Monero. Zcash offered private transactions before Monero did but Zcash had a less fair launch than Monero and rewards 20 % of each block reward to insiders. Monero today has a market cap six times bigger than Zcash.
Bitcoin spending conditions are expressed in Bitcoin script which supports branching through if/else but does not support loops, as the concept of paying "gas" for program execution was not yet invented. That credit goes to Ethereum. Also some commonly used instructions such as multiplication have been disabled in Bitcoin because of a potential for undefined behavior.
See https://ethereum.org/en/developers/docs/scaling/zk-rollups/#use-zk-rollups for a list of Ethereum-based layer-2 solutions.
Predicting such future technological breakthroughs is notoriously hard. As-of-yet undiscovered problems may prevent large-scale quantum computers from ever existing, or recent advances in AI may hasten their arrival. So a survey among quantum computer experts is probably the best data point we can get: https://globalriskinstitute.org/publication/quantum-threat-timeline-report-2020.
BIP300 "Hashrate Escrows (Consensus Layer)" and BIP301 "Blind Merged Mining (Consensus layer)" are proposed changes to the Bitcoin protocol which would allow sidechains without trusted entities. These trustless sidechains are called "drivechains" and their base currency is bitcoin which have to be transferred from the Layer-1 (regular Bitcoin network) to these sidechains. See https://www.drivechain.info for more info about Drivechains on Bitcoin.
The Bitcoin sidechain Liquid which offers confidential transactions and asset issuance has seen a drop in capacity since October 2022. See https://liquid.net. The capacity of the Bitcoin Lightning Network has only ever gone up.
Preventing address reuse mitigates the risk from quantum computers, but even in the case where no address is ever reused on the Bitcoin network it still leaves the quantum attacker with a window from when the signed transaction is published until it is mined to find the secret key from the public key, as the public key is contained in the signed transaction that has not yet been mined.